Northwest falls as fare hike fails; Mylan, Chaparral Steel, others slate deals

By Paul Deckelman and Paul A. Harris

New York, June 17 - Northwest Airlines Corp. bonds were seen losing altitude Friday after the Eagan, Minn.-based air carrier tried unsuccessfully for the second time this month to raise fares; the abortive fare hike attempt knocked its shares for a loss, which took the bonds down in tandem, traders said.

High-yield spreads ended unchanged on Friday but were tighter on the week, according to a market source.

No issues priced during the session, however news of four new deals surfaced. The two biggest - with a combined three tranches - are coming from the transaction in which Texas Industries Inc. will spin off its subsidiary Chaparral Steel Co. Both of those companies are offering bonds.

Hence the week of June 13 came to a close having seen seven dollar-denominated tranches price for a total of $1.556 billion, which was roughly one-third of the previous week's volume: $4.630 billion in 11 tranches

As the week closed, just over $46 billion of dollar-denominated issuance in 183 tranches had priced year to date as 2005 continues to fall further and further behind 2004 in year over year totals. In 2004 to June 17, $72.3 billion had priced in 295 tranches.

Not much conviction?

A buy-side source who spoke to Prospect News on Friday said that deals in the primary market seem to be doing pretty well, and noted that both of the par-pricing dollar-denominated deals that were completed on Thursday, Emmis Communications Corp.'s new Libor plus 587.5 basis points floating-rate notes due 2012 and Celestica Inc.'s 7 5/8% subordinated notes due 2013, were trading at premiums shortly after mid-day on Friday.

At that time the investor spotted the Emmis notes at 101.25 bid, 101.75 offered and the Celestica notes at 100.25 bid, 100.75 offered.

Banc of America Securities was sole books on Emmis, and was on the left in the Celestica deal with Citigroup, Deutsche Bank Securities also joining as bookrunners.

The buy-sider, who spoke on background, acknowledged taking part in the Celestica deal.

"I heard that the book was pretty well oversubscribed," the investor commented.

"But even when these deals are oversubscribed they don't necessarily trade gangbusters. It just seems like people are content to take their allocations and go home, even if they really didn't get what they put in for.

"The market is pretty quiet," the source added. "People don't have a lot of conviction on what the next trade is."

Texas Industries' spin-off brings three tranches

The forward calendar took on a bit of heft Friday as two roadshow starts were announced. Both of them involve Texas Industries Inc.'s spin-off of Chaparral Steel Co.

The latter company, Chaparral Steel, will begin a roadshow on Monday for its $300 million two-part offering of notes (B1/B) via Banc of America Securities and UBS Investment Bank.

The Midlothian, Texas-based company is offering eight-year senior notes and seven-year senior floating-rate notes, with tranche sizes remaining to be determined.

Meanwhile Dallas-based construction materials company Texas Industries will begin a roadshow Tuesday for its $250 million offering of eight-year senior notes (Ba3/BB-).

The same two investment banks, in reversed order - UBS Investment Bank and Banc of America Securities - will run the books.

A source close to both deals commented that Chaparral is selling $300 million of bonds and making a $50 million draw on its credit facility, and giving the money to Texas Industries for the spin-off. Texas Industries will take that $350 million, plus the $250 million proceeds from its own bond sale to take out the $600 million of 10¼% notes that Texas Industries has outstanding.

Two more on the horizon

In addition to the Texas Industries/Chaparral business, two other prospective issuers appeared on Friday.

Mylan Laboratories Inc. plans to make a $500 million offering of 10-year senior unsecured notes (BB+) via Merrill Lynch & Co.

Timing remains to be determined.

The Canonsburg, Pa., pharmaceutical company will use the proceeds, along with cash on hand, to fund its share repurchase program.

And Wal-Mart photo studio operator Portrait Corporation of America (PCA International Inc.) plans to sell $45 million of four-year senior secured notes in a private placement during the June 20 week via Jefferies.

Slim calendar

The upcoming week will get underway with only three offerings poised for pricing before the Friday close.

Chiquita Brands International Inc., the only U.S.-based issuer on the calendar, plans to sell $225 of 10-year senior notes (B3/B-) via Morgan Stanley and Wachovia Securities.

Korea-based Hynix Semiconductor Inc. will attempt to price its $750 million dual-tranche offering (B1/B+), via Citigroup, Deutsche Bank Securities, UBS Investment Bank and Merrill Lynch & Co.

And Ocean Rig Norway plans to price $150 million of eight-year senior secured second-lien notes (B3/B-) via Morgan Stanley.

Emmis up in trading

Secondary market traders reported that Emmis Communications Corp.'s new senior floating-rate notes due 2012, which priced late Thursday at par after having been upsized to $350 million from $325 million, were well received when they were freed for aftermarket dealings. One trader was saying that the Indianapolis-based radio broadcaster's new bonds "really popped on the break," and moved up to 101.5 bid, 101.75 offered.

A second trader echoed that assessment, quoting the new bonds just a shade below that level, at 101.375 bid, 101.75 offered.

Interestingly, the bonds did well even though the primary purpose of incurring the new debt is to benefit the company's shareholders, by largely funding its plan to buy back up to $400 million of the outstanding common shares, either via Dutch auction tender offer or via open-market purchases. Emmis will also use $100 million of credit facility borrowing at its principal operating subsidiary, Emmis Operating Co., toward this purpose, according to a filing with the Securities and Exchange Commission.

Emmis did tip its hat toward the bondholders, however, by adding in its official announcement of the pricing that proceeds of the bond issue, along with other indebtedness, could also be used to repay or refinance indebtedness.

A market source meantime pegged the company's outstanding 6 7/8% notes due 2012 also better, at 98.5, up a point.

Celestica edges up

Celestica Inc.'s new $250 million issue of 7 5/8% senior subordinated notes due 2013 traded less well once they were freed for secondary trading, with a trader noting that the new bonds had "got as good as 100.5," before easing from that peak to close at 100.25 bid, 100.5 offered, up slightly from their par issue price Thursday.

They "did OK," said another trader, who saw the new bonds going home at 100.125 bid, 100.5, after having gotten up to 100.5 bid, 100.75 offered earlier in the day.

Northwest plunges

Back among established issues, traders said that for yet another day, activity was very dull, with "everything becoming dead about an hour-and-a-half after I walked in," one said."

Another trader said that "Northwest [Airlines] got killed, some people played in the new deals, but otherwise, there was not much going on."

A trader said there was "insider selling [of the stock], oil back up at $58 and labor issues" dragging down the fourth-largest U.S. air carrier's bonds Friday - and the worst may be still to come."

"I think they meet on the 20th with their unions again and who knows how that will go - there'll be some more bad headlines and the bonds will trade down."

They were already trading down Friday, he said, with the 10% notes due 2009 falling to 45.5 bid, 47.5 offered, down a point from Thursday's levels, and its 8 7/8% notes due 2006 half a point lower at 67 bid, 69 offered.

The other trader also saw the 8 7/8% notes at 67 bid, 68 offered, which he estimated was down a point, blaming the retreat on "a lack of any buyers, plus negative news," which he said "caused the paper to sell off huge."

Northwest's Nasdaq-traded shares dropped 36 cents (6.69%) to $5.02, although volume of 3.7 million was only slightly above the norm.

One factor, no doubt, was oil, which was up $1.89, or 3.3% on the day and 9.2% on the week to close Friday on the New York Mercantile Exchange at $58.47 per barrel on July-dated contracts, easily eclipsing the previous all-time high close of $57.27, set back on April 1. During Friday's session crude also reached a new all-time intraday high of $58.60, blasting away the old peak of $58.28, set on April 4.

Crude oil prices are seen as a reliable indicator of probable future jet fuel price trends, and with oil spiking up, the airlines are seeing an ever-bigger dent in their bottom lines from energy costs, and are trying to find ways to bring in more revenue.

But after Delta Air Lines Inc. announced earlier this year that it would cap one-way fares at a maximum of $499 - well down from over $1,000 previously - rivals like Northwest were forced to lower their own prices on many routes to stay competitive.

Trying to boost revenues, Northwest announced on June 9 that it would increase business fares by $50 each way - but it had to back off just three days later after Delta and AMR Corp.'s unit, American Airlines, failed to match it.

Northwest tried again to take fares up on Thursday, this time a more modest $10 rise over the $499 cap - but the result was the same. Northwest was forced to beat a hasty retreat just a day later, abandoning the fare hike. America West Airlines also raised fares and backed off - while bankrupt US Air Group and United Airlines and Continental Airlines Corp. are still sticking - for the moment - to their $10 increase.

Secondary generally quiet

Outside of the slide in Northwest bonds and the new-deal aftermarket activity, traders said, not much else was going on.

In the recently volatile automotive supply sector, one said, Visteon Corp.'s 7.95% notes coming due this August "aren't moving," anchored at 100.25 bid, 100.5 offered, while the Van Buren Township, Mich.-based components maker's 8¼% notes due 2010 were a quarter-point better at 95.25 bid, 96.25 offered.

He also saw Delphi Corp.'s 6.55% notes due 2006 unchanged at 97.25 bid, 98.25 offered, and while the Troy, Mich.-based automotive electronics manufacturer's longer paper was down about a point or so on the day, volume was light and "most of the damage was done [Thursday] and the day before."

He saw Delphi's 7 1/8% notes due 2029 ending at 70 bid, 71 offered and its 6½% notes due 2013 about 76 bid, 78 offered, down 1¼ points on the session.

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